One of the discouraging things about working in cryptocurrencies is that almost all the outside focus is on price changes and the resulting fortunes won and lost. Since the most insubstantial assets have the greatest price volatility, this can lead casual observers to think crypto is all froth and nonsense.
The latest example is the excitement over the price decline of Bored Ape Yacht Club and similar “blue chip” collectible non-fungible tokens (NFTs). Blame for the decline was directed toward the poor market reception of Azuki Elementals NFTs, brought out by Chiru Labs, creators of some of the most popular and valued collectible NFTs. What hasn’t gotten a lot of attention is that there is a reasonably stable market for better-quality NFTs that seems to have staying power.
A non-fungible asset is unique — like a specific house — while a fungible asset exists in a large identical supply — like oil. In a direct comparison, you can buy a non-fungible ticket for a specific seat at a sporting event, or a fungible general admission bleacher seat that is identical to all other tickets for the same bleacher section. Most of the serious NFT projects in crypto today are tokenizing non-fungible assets. In other words, the asset itself is already non-fungible, so any token evidencing ownership is automatically non-fungible. This is similar to what StubHub and similar sites have done to baseball and other event tickets. Each ticket is non-fungible, but an app lets you easily buy and sell them.
If you think about it, not many things are truly non-fungible. Futures markets require thousands of pages of detailed specifications to make something like wheat or nickel into something that can be traded as if it were fungible. Even among seemingly identical boxes in a supermarket, shoppers may reject a package that looks a bit scuffed, or search for the one with the latest expiration date. Also, careful shoppers spend a lot of time choosing which fruits and vegetables are best.
You may or may not believe there is great economic value in tokenizing non-fungible assets and moving transactions to cryptographically protected ledgers (not necessarily distributed public ledgers as with a blockchain), but it’s clearly a serious effort by some very smart developers backed by large amounts of capital. You don’t read much about it because (a) it’s boring, (b) it has no “killer app” successes to date, and © the need for it is undercut by more traditional approaches to trade non-fungible assets like StubHub and Airbnb. I’m a cryptophile so I’m betting — both emotionally and monetarily — that it will succeed and change the world for the better, but that’s not my topic for today.
The NFT craze that began in 2021 was about creating NFTs for things that were not assets, or barely assets, that were fungible, or barely non-fungible. The “non” was in the token, not the underlying thing, and the token was real, but the thing might not be. Wall Street would call these synthetic non-fungible securities representing fungible non-assets (SNFSRFNAs, except we’d cheat to get something pronounceable like SNARF ‘EM UPS).
This is not as crazy as it sounds. Things like stadium naming rights are not assets and are made non-fungible only by the transaction that sells them. There may be one official name for a stadium, but anyone can call it whatever they like, and most people ignore the official name. I’ve seen a lot of baseball at the old Comiskey Park in Chicago and never heard anyone but a paid announcer call it Guaranteed Rate Field. People pay to own art stored in a warehouse or lent to a museum, to get “Executive Producer” credits on movies, or to be listed as a “Platinum donor” at some gala event.
Some NFTs have a connection to an artist or celebrity. NBA TopShot NFTs share revenues with the players pictured, while musicians and artists can sell NFTs to their fans. In these cases, the buyer may feel some collectible value, but the main motivation is usually to share with — and thereby form some kind of psychic connection with — the subject or creator of the NFT. The market for these types of NFTs had its bubble and crash (the crash mainly due to overproduction of the most popular NFTs), but the good quality ones retain significant value and some active trading. Somewhat similar are NFTs for virtual assets used in online games or worlds. Whether or not you want to call these assets, or use “non-fungible” for something that could be costly and duplicated millions of times, is up to you.
That brings us to Bored Ape Yacht Club and Azuki Elementals and similar top-price, celebrated NFTs that have been crashing in price. There are assets of a sort underlying these NFTs — admission to some real-world and virtual events, ownership of a digital image — but the assets were created in order to have NFTs; there was no demand for them without tokens. Moreover, the prices of even the cheapest NFTs of this type cannot possibly be justified by the asset value. The underlying tokens are technically non-fungible because they are represented by unique digital images, but these images can be hard to tell apart, and they’re generated by a computer, albeit with human input. The Azumi Elementals failure was blamed on excessive similarity to a previous Chiru Lab creation, making them seem too fungible for an NFT collection.
I don’t think this spells the end for blue chip NFTs with basically fungible underlying. The core idea of people paying for membership in a community with cool badges is economically sound. Scarcity, age, celebrity participation, and creative quality will confer value as they do in other domains. But I suspect the market will have to stabilize at much lower valuations, which will reduce the attention and celebrity interest.
It's tokens for non-fungible assets that deserve more attention from developers and investors. This is a sector with huge growth potential rather than one that must deflate to stabilize. This is what might change the world, not just ruin a few bank accounts.
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